Fed May Pause Rate Hikes, but Rates Still Expected to Decline in the Medium Term
Chicago Federal Reserve President Austan Goolsbee suggests that the central bank may pause interest rate increases for the time being. However, he anticipates rate reductions over the next "12-18 months" as economic uncertainties subside.
Following a positive January jobs report, Goolsbee characterized the labor market as "solid" and approaching "full employment." Despite slightly lower job creation than expected, the unemployment rate fell to 4.0% and wages experienced a 0.5% increase.
Regarding Fed monetary policy, Goolsbee believes that "we may be on hold," but expects rates to settle "a fair bit below" current levels in the long run. He cites declining inflation and uncertainties surrounding Trump administration policies, including tariffs and tax cuts, as factors influencing the slower pace of rate adjustments.
Goolsbee emphasizes that the Fed faces the challenge of distinguishing between "transitory" and "permanent" inflation, particularly in light of potential tariff increases. If Trump's tariffs persist or expand, it could create a more challenging economic environment.
Despite concerns over trade uncertainty, Goolsbee expresses optimism about the stability of the job market, solid economic growth, productivity improvements, and wage growth aligned with 2% inflation.
He projects that rates will eventually settle below current levels, but the Fed is unlikely to reach neutral (neither boosting nor slowing growth) by the end of the year. Instead, Goolsbee anticipates a gradual approach to neutrality over the next few years.